Under the new rules, details furnished by e-commerce companies will be verified against the details provided by the merchants, which can reign in discrepancies in payments
India is set to roll out the Goods and Services Tax (GST) from July 1, which is expected to pare the costs borne by logistics and e-commerce startups face in India.
The e-commerce players that depend heavily on third-party logistics firms to transport goods to the customer’s doorstep have largely welcomed the new GST regime, which they say will ease the hassle of inter-state ferrying of goods under a centralised tax regime.
“We believe GST is good for the e-commerce industry as it would eliminate hurdles in inter-state delivery and subsume the entry tax introduced on e-commerce shipments by some states,” a spokesperson for Amazon India said.
Apart from easing the hurdles in transporting goods across states, the uniform tax will also bring down costs of warehousing. There will be a move to create bigger distribution centres, as Indian companies would now need fewer warehouses.
“The barriers at state borders will ease. The complexity of paying different taxes in 29 different state territories will also ease. Warehousing will become more integrated. We won’t have to set up warehouses in different states,” TA Krishnan, CEO of logistics firm Ecom Express said.
Currently, online marketplaces and logistics companies have set up warehouses in different states in order to avoid tax burden of different regions.
According to Care Ratings, the GST is expected to trim logistic costs by up to 20 percent from the current levels.
“The cost of logistics is currently very high in India, costing about 15 percent of GDP. In mature markets, it stands at about 8 percent. With GST, multiple layers of tax will reduce thus bringing down the overall cost. In the long-term, it will also help reduce the unorganised element in the logistics sector,” Neil Shah analyst with Counterpoint Research says.
This will boost demand for high tonnage trucks and lead to overall reduction in transportation costs, he adds.
Flipkart, which owns logistics startup EKart, and Snapdeal that runs Vulcan, did not comment on the impact the new GST rates, will have on their operations.
Trouble at Source
One direct provision in GST that is expected to directly impact the online retailers is Tax Collection at Source (TCS) by marketplaces. Although the TCS is set at its lowest at 1 percent, the levy ignores the pleas of e-commerce players who have been lobbying against it.
The GST regime has mandated all online marketplaces to deduct 1 percent tax from the proceeds given to merchants and suppliers, which is expected to impact the cash flows of the sellers.
This provision is specific to electronic commerce and doesn’t apply to brick-and-mortar retail outlets.
At the moment, e-commerce sector in India is at less than 2 percent of the entire retail segment.
In February, the online retail players had argued that TCS would result in a capital lock-down of about Rs 400 crore per annum and may discourage merchants, especially small-scale sellers, from selling online.
Amazon had also argued against TCS saying it can put up to 1.8 lakh jobs in the industry at risk, where small and medium retailers using the marketplace will be the worst affected as the lock-in will impact their working capital.
According to analysts, it could also lead to procedural hassles for e-commerce companies who will now have to follow additional compliance.
Industry body FICCI also spoke against the TCS levy saying that 90 percent of the suppliers on e-commerce marketplaces are small and medium enterprises hence it would be challenging for them to comply with these reporting requirements.
If the TCS deduction discourages sellers from retailing their products online, it could be a problem for e-commerce players, Abheek Singhi of BCG Consulting Group says. “A lot of e-commerce sales are attractively priced because they get pricing benefit from merchants based in states that have lower VAT rates. This helps online marketplaces compete better with local retail across India.”
Mobile phones, for instance, attracts a tax rate of 5 percent in Karnataka, while in Maharashtra it is at 13.5 percent. So an online buyer sitting in Mumbai can buy a cheaper phone from a seller in Karnataka. However, the e-commerce players will lose that advantage under GST, in any case.
On the positive side, merchants evading tax payment on their online sales can be detected easily.
Transparency in online marketplaces
Under the new rules, details furnished by e-commerce companies will be verified against the details provided by the merchants, which can reign in discrepancies in payments.
It also mandates that all merchants supplying goods and services to online marketplaces to register under GST, irrespective of their threshold.
Post registration, merchants will have to report sales from online channel separately from their offline sales.
The marketplaces are also required to disclose sales and returns data along with merchant details in their filing. This would make it difficult for sellers and online marketplaces to misrepresent their book of accounts.
The e-commerce players are also suggested to maintain internal seller rating, which will help them identify merchants who are diligent in making their tax filings.
This, says Shah, will improve the quality of sellers on their platform.
For e-commerce platforms, this can be a positive given the constant tussles with sellers.
The new system will introduce effective tracking and ensure that all supplies are captured within the tax system.